How do you find trade setups? Odds are you use a combination of technical and fundamental analysis to develop a thesis then find a way to express that with a trade that would be profitable if you are correct. The technical and fundamental analysis done before entering a trade can vary wildly from trader to trader. Some retail traders find a great level of success trading their strategies but for most this isn’t the case. By some reports as many as 9 in 10 active retail traders lose money in the long run. This means that while there may be traders out there who consistently make money trading their strategy the vast majority of retail traders never find real success. While the typical retail trader struggles however, institutional traders have a much higher likelihood of success.
So as we enter the New Year retail traders should be asking themselves how they can trade more like an institutional trader. It’s not easy. Institutional traders have inherent advantages that retail traders can never hope to compete with, but if retail traders know where to look they can find everything they need to trade more like a hedge fund manager.
First let’s discuss why we want to trade more like institutional traders. These traders have advantages that retail traders can’t hope to replicate. Below are the main advantages that institutional traders have over the average retail player.
- Capital – This is the institutions main advantage. Most of their competitive edge is derived from the fact that they have access to large pools of capital. This allows them to afford the best technology, manpower and gives them the leverage to trade positions that retail traders wouldn’t be able to.
- Information – Institutions have better access to information. We know that the vast majority of institutional traders are honest and play by the rules but there are many who take advantage of insider information and use it in their trading. While we do not often hear about insider traders getting caught an insider executes a trade every day. Examples later will make this clearer.
- Manpower and Technology- How many hours a week do you spend doing market “homework?” By this we mean any research or educational activity related to your trading done outside of regular market hours. No matte how much time you spend, you are always going to be limited by the fact that you are one person trying to consume and analyze information. Institutions have teams of analysts pouring over every single piece of publicly available information trying to form an informed opinion about a specific stock, sector or instrument. This means that even if an institution is not using insider information (and most aren’t) they are still able to do a much more thorough analysis of all available information. Essentially the retail trader cannot compete with the hedge fund machine in this regard.
With all of that said it seems like there is no hope for the retail trader to trade like an institution. The advantages that they have are simply too difficult to replicate. Not to mention the fact that we do not want anything to do with insider trading. It may seem like trying to trade more like a hedge fund manager is impossible for a retail trade but that isn’t the case. Here enters unusual options activity.
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